Blended financing helps fill B&R project funding gaps

Blended financing is an emerging method of development funding that is being widely adopted by members of the Development Assistance Committee (DAC) of the Organisation for Economic Co-operation and Development (OECD).

In 2015, the UN proposed its Sustainable Development Goals, which left a gap for development fund financing. Leveraging more private funds is inevitable. Recently, DAC members issued a document called Blended Finance Principles, with a policy interpretation that further clarified and regulated the procedures of blended financing.

Analyzing this policy can help keep up with changes in the international development assistance situation and improve China’s foreign aid policy. It can also shed light on promoting international financial cooperation during the implementation of the Belt and Road (B&R) initiative.

It is necessary to expand the scale of blended finance. On the one hand, there is a capital gap. The UN Conference on Trade and Development (UNCTAD) has estimated an annual $2.5 trillion funding gap that official assistance can’t cover. On the other hand, as an important model, blended finance can enable public capital to leverage private capital to fill the gap. However, barriers such as high risks and uncertain returns on investment must be resolved.

Official Development Aid (ODA) must bear the responsibility of mobilization. ODA should plan strategically and balance risks and benefits for private capital while investing in public goods in developing countries. There should be more innovation and flexibility in using financial instruments including warranties, securities, hedge funds and political risk insurance.

Diverse financial instruments can target different risks, which will help support commercial capital to achieve sustainable results. In particular, the structural blended finance plan will provide commercial capital with a larger risk cushion.

Blended finance has multiple participants. Traditional bilateral donors have paid more attention to leveraging private capital. With different levels of proficiency, most DAC countries are actively applying blended finance. From 2000 to 2016, DAC countries funded 167 projects in this manner. Multilateral development banks including the World Bank have used this method to improve the market environment of developing countries and address market failures. Private capital including sovereign wealth funds, commercial banks, corporations and charity funds have also shown an increasing willingness to participate.

Some conclusions can be drawn on trends in development fund financing.

Blended finance will be an important funding method in the future. According to the OECD, ODA attracted another $81.1 billion in private capital from 2012 to 2015, with blended finance projects between China and Africa taking up 30 percent. There are also countries that specialize in bilateral aid such as the US, which has made the “Power Africa” a success in drawing in private capital.

China also faces a problem, in that its foreign aid does not grow fast enough to meet the needs of infrastructure construction from the countries and regions joining the B&R initiative. Therefore, blended finance will be widely used by traditional and emerging donors.

Attracting effective commercial capital has become a concern of donors. But how to do this has become a topic of discussion. The EU recently issued a new plan stressing the idea of leveraging private funds by giving guarantees. So to improve financing for the B&R initiative, China should focus on mobilization of commercial capital and use multiple financial instruments to make projects more economically viable.

Project management innovation should be the top priority. Evaluation is the basis of foreign aid management. However, due to the complexity of blended funding, it is difficult to evaluate a sufficiently large data sample. According to the OECD, it is hard to assemble a blended capital forecast that is sustainable and comparative because of the absence of case studies and data analysis.

However, China should gradually replicate and promote pilot projects that use blended financing in the B&R initiative. It shouldn’t emphasize the failures of this method, which might discourage interest among commercial capital